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ECS561Dynamic Theories of Price and Investment in Markets with Imperfect Competition

Spring 2019

This course investigates dynamic firm conduct with respect to price and investment in imperfectly competitive markets. Students will be exposed to analytical and numerical methods within two game-theoretic frameworks: equilibria in repeated games and Markov Perfect Equilibria in dynamic games with state variables. Pricing issues to be explored include penetration pricing (in the presence of learning-by-doing), predatory pricing, and collusive pricing. Our examination of collusive pricing is motivated by two empirical phenomena:

1) collusive practices by intermediate goods cartels in the face of private monitoring for compliance;

2) pricing dynamics that may be driven by cartel members desire to avoid detection.

A topic of recent and growing interest among competition authorities is algorithmic collusion whereby learning algorithms, rather than human managers, collude. Recent research shows how artificial agents using Q-learning can coordinate on collusive strategies. Introducing the possibility of predation, we then explore when a market leader invites competitors to collude and when it instead seeks to drive competitors out of the market. Investment is studied in the context of capacity expansion and product quality improvement. Competition in capacity investment offers an explanation for persistent differences in market shares not tied to cost or product heterogeneity. Investment in product quality will be examined while endogenizing whether firms compete or collude in prices. A welfare trade-off emerges in that consumers can be better off under price collusion due to intensified competition in product quality.

Have a sound knowledge on Markov Perfect Equilibria in dynamic games with state variables

Skills

At the end of the course students will:

Be able to use analytical and numerical methods within two game-theoretic frameworks

General Competence

At the end of the course students will:

Understand how important pricing issues affect the market outcomes in the economy: In particular on penetration pricing (in the presence of learning-by-doing), predatory pricing, and collusive pricing.

iv) how you plan to use that model to address the research question (that is, the types of results you plan to derive, e.g., comparative statics);

v) some progress in executing the project.

If it were successfully executed, the project must be an original contribution which means either that you've proposed an original research question or you've proposed a new approach to tackling an existing research question.

The length of the project should be 10-15 pages.

The project is due 2-3 weeks after course completion and is anticipated to require around two weeks of work (70 hours).